Several strategies can be used to benefit taxpayers planning for required minimum distributions, particularly in their pre-retirement years. Those planning opportunities do not disappear once they reach their required beginning date and become obligated to take RMDs.

An individual's RMD is determined as of Dec. 31 of the prior year — so there's no longer an opportunity to reduce 2026 RMDs. But considering today's volatility in the equity markets, many clients may be interested in learning whether their timing approach to taking RMDs can make a difference.

While that timing — taking the RMD early in the year or waiting until year-end — doesn't affect the amount that must be paid, it's important that clients understand the pros and cons of the various approaches when developing a strategy for satisfying Internal Revenue Service rules.

Waiting Until Year-End for RMDs

It's not uncommon for retirement account owners to take their RMDs in one lump sum at the end of the year. The primary benefit is that the funds remain invested for the year and can produce tax-deferred growth.

This is particularly true for clients who don't immediately need the proceeds from their RMD and plan to reinvest them in a taxable account. Even in volatile conditions, markets do tend to rebound, so most clients would benefit from allowing the funds to continue growing.

Tax-deferred compounding can result in significant increases for taxpayers with large account balances. For smaller investors, the benefits may not be as significant. Of note, the RMD period is usually shorter than the client's accumulation period, and if a retiree's portfolio is relatively conservative, the benefits of keeping the funds in the tax-deferred account may be limited.

Downsides of waiting until year-end include an added risk that clients will forget to take their RMD or that retirement plan sponsors won't have sufficient time to execute the transaction.

Considerations When Taking RMDs Early

If clients are using an RMD to cover living expenses and have concerns about market performance for the year ahead, taking it early can give them the peace of mind that their funds aren't at risk.

In particularly bad downturns, Congress may act to suspend RMD obligations for a year. Individuals who take their RMDs early in the year because of market fears would then need to consider putting the funds back into their retirement account.

Clients planning to execute Roth conversions may benefit from taking their RMDs early in the year. Individuals are required to satisfy their RMD obligations before executing a Roth conversion.

Spacing Contributions Throughout the Year

Another option is to split the difference and the RMD in intervals throughout the year. The primary risk associated with this strategy is miscalculating the amount, although many custodians and providers will calculate the installment payments on the client's behalf.

This reduces the concern of getting it wrong and incurring penalties.

Electing this method also reduces the risk of withdrawing the funds too early or too late in the year. The strategy ensures that the clients receive a range of prices for the assets they sell throughout the year.

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